Exclusion of Belarusian oil products from Ukrainian market: threat for Belarus’ economy

The Finance Ministry published a report on JSCs’ performance in Q1 2013.

Belarus lacks significant oil reserves, but its oil refineries have a significant impact on the economy. Reaching an agreement on oil supplies has shifted the emphasis to problems with the sales of petroleum products in foreign markets. The main threat faced by oil refineries in the near future is the substantial loss of Ukrainian markets, which may lead to poorer financial results, both in the industry and in the country as a whole.

Oil refineries play a crucial role in Belarus’ economy. In Q1 2013, Belarusian oil refineries accounted for most of Belarus’ proceeds and earned 9.7% of the country’s total net proceeds. Excise duties on fuel in Q1 earned over USD 100 million. Transportation of petroleum products occupies a significant place in Belarusian railway freight traffic, which, thanks to the rise in railway tariffs as of January 1^st, 2013, has become a highly profitable business. Railway is one of the five largest companies in terms of country’s net proceeds. Refining affects the wholesale trade, agriculture and industry performances.

Oil refineries are likely to continue functioning on a stable basis in the near future. Belarus was able to agree on the volumes of Russian oil supplies in Q3 2013 needed to fill the refineries’ capacity (23 million tons per annum). Russian officials raised claims which were linked to Russia’s budgetary losses from such supplies due to the absence of duty payments for oil deliveries to Belarus (duties on oil products only partially compensate such losses). Oil supplies are used as pressure tool in Russo-Belarusian negotiations about Belarusian property privatization.

But currently, oil supply issues are not as urgent as problems with petroleum products sales in foreign markets.

The main problem is with the Ukrainian market. Belarusian diesel exports to Ukraine have reduced by 30% in January – May 2013. Belarus actively replaced the Ukrainian market with Russian, Lithuanian and even Polish markets. But diesel supplies will continue reducing due to launches of two refineries in Ukraine (one in Odessa by VETEK Company, and one in Lisichansk).

In the past, the Ukrainian market was one of the most profitable for Belarusian oil traders. Belarus may restore supply volumes, but this will be in tandem with a price reduction for petroleum products, which will worsen the refineries’ economy and reduce their net profits.

The situation in one of Belarus’ largest industries is difficult. While oil supply is guaranteed for now, the yield from supplies to one of the major markets may be lowered due to the need to maintain the supply volume. In these circumstances, Belarus might attempt to compensate for losses by raising fuel prices at home.